Facing up to fraud in 2013

Mon, 2013-01-28 03:26 PM

Greg Henderson

IRS estimates put the 2012 tax gap at almost $350 billion, and a recent audit indicated that the IRS may lose $21 billion over the next five years due to identity theft alone -- one of the fastest growing areas of losses to the agency.

A recent GAO report estimated annual losses to Medicare and Medicaid at $70 billion due to fraud, waste and abuse. There’s no doubt about it. Fraud is an increasingly pervasive issue in government programs and results in hundreds of billions of dollars per year in losses.

Here is a look at four issues with which government officials at the federal, state and local levels will have to grapple to stem future losses:

Government resources, especially in public assistance programs, are overwhelmed due to increased demand for services and decreased budgets -- The slow economy has hit people hard. Helping the overwhelming number of people in need remains the primary mission of the relevant government agencies, but sometimes program integrity can suffer. The key will be to automate as much as possible so that resources reach legitimate recipients, in a timely manner. Technology such as advanced analytics can provide risk assessment and help investigators focus on the highest value cases where the most money is at stake.

Fraudsters are becoming increasingly sophisticated and adaptable -- In the past, the majority of fraud was opportunistic. Now, professional criminal organizations launch coordinated attacks across government programs, led by technology and social engineering experts that excel at uncovering security gaps that enable hacking and identity theft.

Recently in South Carolina, approximately 3.6 million personal and 657,000 business income tax returns were compromised in an international hacking attack. Combatting sophisticated attacks such as this requires equally sophisticated analytics. As fast as we plug the gaps, the fraudsters create and exploit new ones.

Advanced analytics, predictive modeling and social network analysis (SNA) allow agencies to rapidly identify aberrant behaviors, as they are happening. These compare personal and peer group benchmarks to identify outliers. For example, pattern analysis can be used to identify behavior shifts that could be indicative of identity theft, while predictive models are used to study fraud from the past to identify common patterns or behaviors that are then used to detect future attacks. Social network analysis can identify linkages between entities to surface collusion and organized fraud rings that might otherwise go undetected by traditional methods.

Fraud rings, organized criminal networks and collusion are now more pervasive in government, and take a holistic view across program -- Professional fraud rings are not just exploiting one government program, or even one at a time. They are very creative in exploiting the gaps across the spectrum.

Thwarting these criminals requires an enterprise approach, where departments and agencies share a common technology layer with common investigative capabilities. So, if I’m investigating a public assistance program provider for both claims fraud and tax evasion, the investigation can be coordinated between the two departments. For example, one customer I talked to recently manually cross-matched tax fraud investigation information with Medicaid investigations and found an 85 percent overlap. The fact is bad people do bad things across the spectrum.

Losses are becoming increasingly difficult to recover -- In the typical government disbursement system, an agency pays a bill, issues a tax refund or issues a check to a program provider. Then, if it determines a high likelihood of fraud later, it attempts to recoup that payment. Unfortunately, “pay and chase” is high-risk, high-cost and not an efficient way of doing things. With identify theft, the situation is even more dire because the government entity often does not know who was truly paid.

In the trends identified above, it becomes readily apparent that analytics technologies can play a healthy role in combatting fraud. Increased demand for services and the movement of many processes to the Internet have flung the doors open to organized fraudsters from around the world. They are coordinated and adaptable, and take a more sophisticated, enterprise approach to defrauding U.S. Government programs than we do to protecting them. It is imperative that 2013 see a rapid proliferation of advanced analytics technologies to help us make sure government assistance goes to the people who truly need it.

Greg Henderson is the government practice lead in the fraud and financial crimes global practice at SAS. He can be reached at: